Iceland, IMF `Very Close' to Deal; Japan May Help

By Tasneem Brogger

Oct. 21 (Bloomberg) -- Iceland's government is ``very close'' to a rescue deal with the International Monetary Fund that may also include financial help from Nordic neighbors and Japan, Industry Minister Oessur Skarphedinsson said.

The fund is preparing a plan to present to the government, which is also seeking a loan from Russia, Skarphedinsson said in a telephone interview from Reykjavik yesterday. The Financial Times and New York Times reported that the rescue will be worth $6 billion.

Iceland needs aid from the IMF and Nordic countries after the collapse of its banking system froze its foreign-exchange market, making it hard for importers to finance purchases. Glitnir Bank hf, Landsbanki Islands hf and Kaupthing Bank hf imploded with debts of $61 billion, or as much as 12 times the size of the economy.

``It's clear from our diplomatic contacts that if and when an agreement is made between the IMF and Iceland, then our neighbors would be quite willing to sail in their wake,'' Skarphedinsson said. ``We in fact have confirmation of what I would label quite generous lending facilities.''

Norway, Sweden and Denmark would probably follow any accord with the IMF, with Japan also a candidate to provide the Atlantic island with aid, he said.

``We are part of the Nordic family,'' Skarphedinsson said. ``It's really stating the obvious to say that definitely the Nordic countries would be among those that would seek to assist us through this crisis, when and if we go to the IMF.''

Nordic Family

The central banks of Denmark, Norway and Sweden in May provided Iceland with a euro swap facility worth a total of 1.5 billion euros ($2 billion). The central bank of Iceland has so far drawn on 400 million euros of that.

Skarphedinsson declined to comment on the Financial Times report that said $1 billion will come from the IMF and the remainder from Nordic governments and Japan. The New York Times said Russia will make a contribution.

The chief press officer at Sweden's central bank, Britta von Schoultz, declined to comment. Norges Bank head of communications said she wasn't ``aware of'' any agreement with Iceland linked to a possible IMF deal. Calls made to Danish central bank spokeswoman Louise Buchter weren't immediately returned.

`Good Neighbor'

Swedish Finance Minister Anders Borg said his government was in discussions with Iceland.

``We will try to be a good neighbor,'' he told reporters in Berlin yesterday. ``But eventually this is up to Iceland because they have to get into an IMF program, and that is an essential part of them re-establishing themselves.''

Japanese Finance Minister Shoichi Nakagawa said at a news conference today that he hadn't heard whether the IMF or Iceland asked his government for aid. Nakagawa told his Group of Seven counterparts in Washington this month that Japan is ready to contribute to the IMF's emergency lending program.

``Japan wants to show its initiative in the global response to growing financial risks,'' said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.

Iceland's opposition leader Steingrimur Sigfusson criticized the government's handling of the crisis, calling for better economic management.

``We know what to do if we have an earthquake or a natural catastrophe, we put up a control center, much the same as a country does if it has a war on its hands,'' Sigfusson said. ``But the government hasn't done this so the management has been too weak.''

3 Cents

Bonds of Iceland's three biggest banks are on sale for as little as 3 cents on the dollar after the government began a restructuring that may leave debt investors with nothing, according to broker KNG Securities LLP.

The three lenders have together amassed debt equivalent to about 12 times the size of the economy, according to Bloomberg data. The government has yet to provide a clear plan on how that debt will be repaid since taking control of the banks. Glitnir and Kaupthing have already missed making bond payments.

The failure of banks on the island, with a population of only 320,000, is affecting investors and depositors across the globe. Kaupthing is poised to become the first European bank to default in Japan's samurai bond market after investors said the Icelandic lender missed a coupon payment. Kaupthing now has a seven-day grace period to honor the obligations.

``The samurai bond default is raising concerns among Japanese banks about whether more will arise and where they might arise,'' said Dai-Ichi Life's Kumano. That said, he added, ``I'm not sure how much this funding to Iceland would reduce the chances of more defaults.''

Shrinking Economy

Iceland's economy may contract as much as 10 percent, according to Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. The central bank on Oct. 15 cut the benchmark interest rate by an unprecedented 3.5 percentage points to 12 percent, indicating policy makers have given up trying to control inflation. Prices may surge as much as 75 percent in coming months, Christensen estimates.

A nation that was ranked the fifth-richest in the world per capita in the United Nations 2007/2008 Human Development Index is now facing shortages of imports including food and clothing. The central bank on Oct. 10 called on commercial lenders to prioritize foreign-currency transactions to cover payment for essential imports such as food, fuel and medicine.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;